“United Airlines and US Airways have shelved plans to merge, the two carriers' parent companies have said”
-BBC, 30th May 2008-
Possible reasons to merge?
- Oil price has surged to a new high of USD $135 & will continue to increase given that oil is a scarce commodity. In any airline firms, oil alone consists averagely as much as 35% of their operating costs & that's a lot.
- Drastic drop in the number of passengers given that now many countries experience slow economic growth & economies are in grea uncertainty. Air travel is perceived as a form of luxury good still. Meaning to say, as income fall, the demand for it will fall by more than proportionate. Those airline operators are severely affected & as such by merging is a good way for them to consolidate financially
- To achieve EOS on various areas e.g. financial, managerial & purchasing
- To strengthen its position in the market to avoid being a target of takeover
- To leverage on each others strength e.g. market share vs. management
Disadvantages of mergers
- Possibility of diseconomies of scale that arise from the difficulty to monitor overly large business, communication failure etc
- Consumers may have to pay higher price
- Airline firms may not reinvest its super normal profit into R&D to discover ways to provide better quality of services to passengers
- May result in cost inefficiency as there is lack of elements of competition in the economy